Marriott and Hilton’s Group Commission Cuts Put Pressure on Industry

Andrew Sheivachman, Skift

- Apr 11, 2018 2:30 am

Skift Take

As hotel chains have shifted their business models over the last decade, keeping owners happy has become the priority. Slashing group booking commissions for intermediaries saves owners money, so it’s easy to see how the largest U.S. chains will follow the example of Marriott and Hilton in the near future.

— Andrew Sheivachman

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Travel agents and meeting planners are becoming the latest group to feel the pressure from hotel industry consolidation.

A decision by Marriott International, with Starwood Hotels in its fold now, to cut group hotel commissions was soon followed by Hilton Worldwide. Marriott has already reduced commissions on North American group hotel bookings to 7 percent, from 10 percent, demonstrating that hotel chains won’t be afraid to put pressure on travel agents and meeting planners in the future (Hilton’s cut will go into effect later this year). It will also likely mean increased costs for corporations and groups that hold events at hotels as agents and planners pass on costs to them as they grapple with the commission cuts from hotels.

“We want to make sure we have [a policy] that is fair and equitable, and we felt this is the right [move],” Brian King, Marriott International’s global officer of digital, distribution, revenue management, and global sales, told Skift. “There was some rumor going around that commissions would be cut to zero, [but that was never an option]… any time a business model shifts, [agents and planners] need to recalibrate their business, but by the same token we’re also encouraging planners to move to a different, [more transparent] planning model.”

King characterized the new policy as the result of pressure from consumers for new meeting product and from owners for reduced costs. Retaining strong relationships with agents and planners was also a priority, even if the model had to shift to allow owners to invest in new meeting spaces and explore new ways to distribute meeting space at a lower cost.

This has serious implications for online booking sites, travel agents, meeting planners, and many others across the travel industry. Let’s take a look at what increased pressure on the ecosystem from the world’s biggest hotel companies will really mean for the industry.

The Hotel Owner Effect

The latest commission cuts on group hotel bookings are directly related to how global hotel chains now operate.

Marriott or Hilton own almost no hotels. In fact, they have become brand and franchise companies, making money off fees and a cut of flagged hotel revenue among other things.

This has resulted in a shift from owning or operating the most successful hotels in any given market to offering the most value to hotel owners and operators under one of their brands.

Marriott International, for example, only owns eight hotels in North America, according to its latest financial filings. This asset-light approach gradually has become nearly standard and can trace its roots to the decline in travel after the 2008 financial crisis.

Reducing commissions on group bookings reduces costs for owners, making the prospect of holding a deed for a Marriott or Hilton property more attractive. Efforts over the last few years to encourage travelers to book directly on the hotels’ websites has had a similar effect.

But there is another issue: discounting. It’s customary for planners to negotiate reduced room rates for group bookings. These discounts erode the profit margin for hotels. Why then is meeting and events spending on the rise, while hotel group business profit remains flat?

Some think it’s a mess of the hotel chains’ own making.

“It’s really interesting to me that first hotels offer a 30 percent discount to get groups, and then pay the 10 percent commission [plus other fees], causing a 44 percent disadvantage serving groups,” said Zane Kerby, CEO of the American Society of Travel Agents, who obviously has a bone to pick in this fight. “But to me, [cutting commissions to third-parties under this rationale] doesn’t make a whole lot of sense, because they’re the ones offering the group discount rate and it’s been rising.”

By allowing owners to walk away with increased profit and shafting the middlemen in the process, hotel chains can clearly demonstrate their value, and commitment, to current and prospective owners.

This is important because Marriott’s now-30 brands pose a new problem to its owners. It used to be that there were restrictions on placing a second Marriott hotel in a market where one was already present. But the glut of similar brands means a hotel owner may build a Courtyard by Marriott property only to end up with an Aloft competing with them just down the street.

This reduces the number of room nights sold by each hotel, and owners are upset because it’s more difficult to grow in a market when you’re competing against brands from your own company. It erodes the value provided by direct booking campaigns and loyalty programs, as well.

This is one major reason why Marriott and Hilton are looking to cut costs instead of streamline and consolidate their brands. The more hotel brands they franchise out, the more money they make regardless of the increased competition among the brands that hurts owners.

Rising Costs

Although not everyone agrees that it comes down to ownership issues. Hotels used to have meeting planners on staff to deal with the booking and planning of events; this process has become outsourced to a variety of third-party planners, venue sourcing organizations, and now a variety of online booking sites for small group events.

“The value chain swung from one side to the other, and a focus on cost became much more of a spotlight issue,” said Cindy Estis Green, CEO of Kalibri Labs, a hotel benchmarking firm. “Hotels have been paying more for the same business, there’s been a spike in costs for relatively flat group business. They’re getting the same business and having to pay double or triple for it.”

In Estis Green’s estimation, tension has been building up in the ecosystem for more than five years.

Kalibri Labs recently released a report crunching the numbers on the costs hotel pay for group business. Its analysis found that larger hotels, which generate the most group business revenue, pay the largest cost as a percentage of group revenue for groups and meetings business.

Cost as a % of Group Room Revenue

Independent (200 rooms)

7.80%

Medium/Small Chain (300 rooms)

8.80%

Big Brand (500 rooms)

16%

Source: Kalibri Labs

“Big hotels write the biggest checks,” said Estis Green.

The commission cuts are related to the cost of customer acquisition for a hotel’s group business; an abundance of factors, from planners and agents to city housing fees and overall technology costs, drive up the cost of a booking for hotels, and this has led the brands to cut costs.

Kalibri Labs suggests that the costs paid out to companies involved in group bookings could double for U.S. hotels by 2022.

Time to Negotiate

Agents have experience dealing with commission cuts, and Kerby expects agents to negotiate directly with hotels and find ways to increase their compensation from the 7 percent floor.

“We don’t have to take 7 percent as an answer; the reality is that when offered the 7 percent, agents will push back on the hotel,” said Kerby. “The hotelier, most of these franchise owners, are in competitive markets so you can’t afford to be the one who isn’t going to pay a 10 percent commission.”

In the months since the Marriott announcement, many hotel chains have pledged to keep commissions at 10 percent or have in some cases even temporarily increased commissions to attract agents and planners.

Agents were unsuccessful in fighting back against airline commission cuts 20 years ago, but the extremely fragmented nature of the hotel industry means they and meeting planners who provide real value have a chance. Unlike five or so major airlines that had the market power to play hardball with travel agents, individual property owners that value group business may be willing to negotiate.

As the industry waits for the next major hotel chain to move in solidarity with Marriott and Hilton, it’s worth considering exactly how tensions between hotel chains and the people who sell their products have reached such a heightened state.Costs and fees have added up, and U.S. hotel chains are now ready to finally push back.

It will also be interesting to see how Marriott’s upcoming negotiations with both Expedia Group and Booking Holdings will fare as they look to further reduce its distribution costs. Marriott CEO Arne Sorenson has been talking tough on his desire to lower commission payments to online booking sites, so this cost-cutting strategy is likely to continue for some time.

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